On December 27th, the President signed into law a second pandemic relief package as part of a larger government funding bill passed by Congress entitled The Consolidated Appropriations Act, 2021 (“CAA”). In March of this year, President Trump signed the first pandemic-related stimulus bill: H.R. 748, the Coronavirus Aid, Relief and Economic Security Act (Public Law No: 116-136, the “CARES Act”). The tax provisions in the CAA, are numerous, but for the most part, extend certain tax relief provided in the CARES Act and resolve the controversy regarding Congress’ intent related to certain CARES Act relief provisions. The CAA also contains several important federal income tax changes, as set out below.
Tax Treatment of PPP Loans
The CAA clarifies that otherwise-deductible expenses funded by loans received under the Paycheck Protection Program (PPP), which was created by the CARES Act, will be deductible under Internal Revenue Code (“IRC”) Section 163. While Congress made clear in the CARES Act that the loans made under PPP were not taxable, it was not clear whether expenses funded by PPP loans would be deductible. Confusion arose regarding deductibility of the expenses when the Internal Revenue Service (the “IRS”) issued guidance that expenses funded by PPP loans would not be deductible. However, the new legislation clarifies that it was Congress’ intent that such expenses be fully deductible.
Retention Credit Expanded
One of the major business policies behind the CARES Act was to encourage businesses to retain their employees during the economic turmoil caused by the lockdowns. To that end, the CARES Act provided an employee retention credit to employers, based on wages (and a proportionate amount of qualified health plan expenses) paid to employees. The CAA increases the credit percentage to 70 percent of qualified wages and expands the wage base to $10,000 per employee per quarter (as opposed to per year in the CARES Act). The CAA also reduces the amount of losses that a business must incur to be eligible for the credit. In addition, the CAA revises the credit to allow a business that received a PPP loan to claim the credit to cover payroll expenses not covered by PPP. The credit expires four quarters after June 30, 2021.
Business Meals Deduction
In an effort to help restaurants that have suffered substantial economic losses during the pandemic, the CAA increases the deduction for business related meals to 100 percent through December 31, 2022. Under current federal income tax law, a business may only deduct 50 percent of the cost of business-related meals.
Again, these are just a few of the many tax provisions proposed in the CAA. Businesses and individuals will be analyzing the impacts of the new law for quite some time.
For additional information, please contact: Jaye Calhoun at (504) 293-5936 or Willie Kolarik at (225) 382-3441.